Dunkin' Donuts 2013 Annual Report Download - page 92

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performance condition, which is the sale of shares by the Sponsors. Additionally, the options are subject to a market condition
related to the achievement of specified investor returns to the Sponsors upon a sale of shares. Upon a sale of shares by the
Sponsors and assuming the requisite service has been provided, Tranche 5 options vest in proportion to the percentage of the
Sponsors’ shares sold by them (“Performance Percentage”), but only if the aggregate return on those shares sold is two times
the Sponsors’ original purchase price. Actual vesting is determined by multiplying the Eligibility Percentage by the
Performance Percentage. Additionally, 100% of the Tranche 5 options vest, assuming the requisite service has been provided, if
the aggregate amount of cash received by the Sponsors through sales, distributions, or dividends is two times the original
purchase price of all shares purchased by the Sponsors. As the Tranche 5 options require the satisfaction of multiple vesting
conditions, the requisite service period is the longest of the explicit, implicit, and derived service periods of the service,
performance, and market conditions. Based on dividends received in 2012 and 2011, and the sale of shares by the Sponsors in
connection with public offerings completed in 2012 and 2011, the cumulative Performance Percentage as of December 28,
2013, December 29, 2012, and December 31, 2011 was 100.0%, 100.0%, and 28.5%, respectively, resulting in compensation
expense of $478 thousand, $3.6 million, and $1.1 million being recorded in fiscal years 2013, 2012, and 2011, respectively.
The fair value of the Tranche 4 options was estimated on the date of grant using the Black-Scholes option pricing model. The
fair value of the Tranche 5 options was estimated on the date of grant using a combination of lattice models and Monte Carlo
simulations. These models are impacted by the Company’s stock price and certain assumptions related to the Company’s stock
and employees’ exercise behavior. Additionally, the value of the Tranche 5 options is impacted by the probability of
achievement of the market condition. The following weighted average assumptions were utilized in determining the fair value
of executive options granted during fiscal years 2011:
Fiscal year ended(1)
December 31,
2011
Weighted average grant-date fair value of share options granted $6.27
Significant assumptions:
Tranche 4 options:
Risk-free interest rate 2.1%–2.7%
Expected volatility 47.0%–72.0%
Dividend yield —
Expected term (years) 6.5
Tranche 5 options:
Risk-free interest rate 2.3%–3.2%
Expected volatility 47.0%–72.0%
Dividend yield —
(1) The Company did not grant any Tranche 4 or Tranche 5 options during fiscal years 2012 and 2013.
The expected term of the Tranche 4 options was estimated utilizing the simplified method. We utilized the simplified method
because the Company did not have sufficient historical exercise data to provide a reasonable basis upon which to estimate
expected term. The simplified method was used for all Tranche 4 stock options, as they required only a service vesting
condition. The risk-free interest rate assumption was based on yields of U.S. Treasury securities in effect at the date of grant
with terms similar to the expected term. Expected volatility was estimated based on historical volatility of peer companies over
a period equivalent to the expected term. Additionally, the Company did not anticipate paying dividends on the underlying
common stock at the date of grant.
As share-based compensation expense recognized is based on awards ultimately expected to vest, it has been reduced for
estimated forfeitures of generally 10% per year. Forfeitures are required to be estimated at the time of grant and revised, if
necessary, in subsequent periods if actual forfeitures differ from those estimates. Forfeitures were estimated based on historical
and forecasted turnover, and actual forfeitures have not had a material impact on share-based compensation expense.